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1031 and "personal property"

Level 3

A client has taken section 179 on tress and irrigation systems, allowed now under the TCJA.  Since it had no basis left, someone told him it is now treated as personal property and as such, now prevented from doing a 1031 exchange (under the same TCJA).  Is this correct or do the tress/irrigation systems keep their original character?  Any guidance is welcomed.

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My recollection from a LKE I had several years ago, where the "only real property counts" rule wasn't in effect, but the "real property isn't like to personal property" rule was the problem, the attorney-CPA 1031 specialist the client used opined that if the immovable personal property was less than 15% of the total, the entire thing could be treated as real property. My client was exchanging mineral interests (some of which came along with the equipment portion of the well) for mineral interests (either undeveloped or no royalties, so no equipment).

I don't have a cite for you, though.

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Level 13

They would keep their original character.  Claiming §179 or having zero Basis would not change that.

However, what is the original character?  I am unfamiliar with what you mean by "tress".   If that is referring to an above ground irrigation system for farming, that could be personal property.

Level 13

If tress = trees, what sort? In the ground? It's pretty hard to 1031 trees and not the land they are planted in, for instance. And just because Sec 179 is available doesn't make it the best choice in every scenario; planning for the future should be part of any evaluation. When was that done? Perhaps it can be amended.

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Level 3

Ok, so bottom line: trees and an underground irrigation system (characterized as real property) are depreciated with code section 179.  Same assets are then exchanged under code section 1031.  Do they keep character of real property and thus eligible for the exchange or are recharacterized as personal property (because of taking 179) and thus barred from doing a 1031 exchange?

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Level 13

The Land has basis, though. You must be trading the Land.

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Level 3

Of course...again, my issue is regarding the irrigation system and trees receiving 179 treatment and possibly losing original character as real property (as part of the land).

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My recollection from a LKE I had several years ago, where the "only real property counts" rule wasn't in effect, but the "real property isn't like to personal property" rule was the problem, the attorney-CPA 1031 specialist the client used opined that if the immovable personal property was less than 15% of the total, the entire thing could be treated as real property. My client was exchanging mineral interests (some of which came along with the equipment portion of the well) for mineral interests (either undeveloped or no royalties, so no equipment).

I don't have a cite for you, though.

View solution in original post

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